What Is The Difference Between a Lease Option and a Lease Purchase Agreement?

While the two terms are often used interchangeably, a lease with the option to purchase (a Lease Option) and a true Lease Purchase Agreement are different agreements.

A Lease Option is a lease where the tenant has the option, but the not obligation, to purchase the property. However, the owner is required to sell the property if the tenant exercises their option. This is a unilateral contract since only the owner is under an obligation.

A Lease Purchase Agreement (also known as a Lease Purchase Contract) requires the tenant to purchase the property before the expiration of the agreement. This is a bilateral contract since both parties have a duty to perform. A lease purchase is typically used when buyer cannot currently qualify for a mortgage and the definitive goal of the parties is the eventual purchase and sale of the property.

Both are often confused with an Installment Land Contract (also known as a Bond for Title or a Contract for Deed), which is a type of owner financing where the purchaser has equitable title to the property but legal title to the property is not transferred to the purchaser until the purchaser has completely paid for the property. However, if properly drafted, neither a lease option nor a lease purchase agreement are actually owner financing. They grant the tenant a leasehold estate only. The tenant is simply being allowed the flexibility of renting the property until closing (or a potential closing in the case of a lease option).

What terms are the same in both a lease option and a lease purchase agreement?

The term “tenant buyer” is used below, in place of the separate terms “tenant” and “buyer”. This is a layman’s term and is not appropriate for the actual paperwork used to create a lease option or lease purchase agreement.

In both cases there will be at least two parties: the tenant buyer (lessee) and the landlord (lessor). In some situations there may be three or more parties. For example, if the owner of the property has turned the landlording responsibilities over to a property management company. Then the tenant buyer would have a contract or option to purchase with the owner, and a lease or rental agreement with the management company. There also would be a property management contract between the owner and the management company.

In both cases, the tenant buyer’s monthly rental payment may be more than the fair market rent. This would allow a portion of the monthly payment to be applied towards the eventual purchase of the property or towards the down payment for a mortgage if allowed by the buyer’s lender. However, if the tenant buyer does not purchase the property, most lease options and lease purchase agreements clearly state that these payments are non-refundable. In the case of a lease purchase, the tenant buyer would actually be in default of contract for failing to purchase the property.